Trading the markets is a learning game

Are you one of those traders who always needs to be right? Maybe you’re like that in most areas of your life. Novice traders fall into this category more so than any other level of trader. The need to be right stems from not being able to accept criticism, and this stems from having an emotional attachment to criticism.

Think about this for a second; our desire to be right all the time most likely came from our earlier years where we were taught that mistakes are wrong. The biggest problem with this way of thinking is that there is an emotional attachment to the mistakes such as feeling inferior or inadequate. Because of these undesirable feelings, we strive to be correct all the time.

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What are you going to do now?

This morning I woke up to the news that in the US the Dow had fallen 2.8% (387 points) overnight, along with falls in other markets. The ASX XJO, the Australian top 200 index has lost 3.7% today in a 229 point fall.

Having been a member of a private forum that focussed on put credit spreads, I know there are going to be many traders that will have found the last two weeks of trading particularly stressful.

The posts I dreaded reading from members of that forum time and time again after falls like this can be paraphrased in five words; “What should I do now?”

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In less than 6 years!

I witnessed an interesting experiment the other day using an compounding calculator. The presenter started with $20,000 and compounded it monthly, starting with 2%, and showed that it would take 16 1/2 years (199 months) to turn that 20,000 into 1 million. At 3% it took just over 11 years (134 months), 4% 8 1/2 years (101 months), and at 5% it took just 7 years. Nothing new here.

However the presenter then added an extra element or dimension to the calculation, and that was - additional periodical deposits. Here is how it went; starting with $20,000 and compounding monthly at 2%, and adding $500 a month from another source, the 20,000 turned into 1 million in only 13 1/2 years, 3 years less than the example above without the periodical additional deposits. Depositing $1000 a month, compounding at 2% a month, the 20,000 turned into 1 million in only 11 1/2 years. In fact, if you take $20,000, compound it at 5% per month and deposit $1000 a month on top, you’ll turn that 20,000 into 1 million in 5 3/4 years, or just 69 months.

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Will controlling fear make us better traders?

In the previous posts in this series we have focussed on fear, as it is often cited as having the biggest impact on our trading psychology.

I would certainly tend to agree, but it is not the only emotion traders need to master.

In this post I’m going to talk about a couple of sins that traders also need to be aware of if they want to learn how to trade profitably.

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Know your enemy!

So far we’ve concentrated on looking at how fear and greed can affect a traders ability to follow their trading plan, and then we started deconstructing those fears piece by piece.

In this post you’ll find some more strategies for dealing with the fears that may be sabotaging your trading.

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Where do your strengths lie?

Understanding where you are strong means having an edge. For example, one that stands out for me is a successful options trader. Before becoming a trader he was in the navy, and one of the things you can associate with defense forces is the strict discipline they must learn. You may or may not already know that discipline is an important key in trading success; and this man turned $10000 into 1 million in 3 years!

Unfortunately, many don’t find out what their strengths and weaknesses are until well after they have taken a solid beating from the markets. An example of this is getting involved in a trading system or buying a course where the meat of the trading is discretionary, meaning you analyze and make discretionary decisions based on your analysis. There is absolutely nothing wrong with this approach if it suits you, but for many it does not. Some people need a solid set of rules that require nothing more than if A = B, then do C, and this is called mechanical trading.

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Controlling Fear and Greed

In my last post on trading psychology we started looking at some of the indvidual fears that traders can have, and also some of the effects greed can have as well. But if you missed reading it, click Understanding Fear and Greed and read that post first before reading on.

In this post, we’re going to start looking at how you may control fear and greed, so I hope you have your list of fears handy as we might be able to cross some of them off.

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Understanding Fear and Greed

In a previous post we talked about lack of a trading plan being one of the reasons traders lose money while trading.

In this post we’re going to talk about one of the other reasons; and that is the inability to trade profitably due to emotions such as fear and greed.

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What’s in your trading plan?

In his song “The Gambler”, Kenny Rogers sang; “You’ve got to know when to hold ‘em, know when to fold ‘em, know when to walk away and know when to run. You never count your money, while you’re sitting at the table, there’ll be time enough for counting when the dealings done“.

He could have been singing about trading, because I think those lyrics cover two of the main issues affecting trader’s success. They are… (more…)

What’s in a name?

Trading and investing can mean different things to different people, so let me share with you the way I define these terms.

I’m sure the dictionary and tax office will have alternative definitions, but to me it’s about the involvement of the trader in actually trading.

Let’s start by looking at decision making.

To me, a trader is someone who… (more…)